Silicon Valley Venture Capitalist Confidence Index™
(Bloomberg ticker symbol: SVVCCI)
Second Quarter – 2022
(Release date: August 8,2022)
Mark V. Cannice, Ph.D.1
University of San Francisco School of Management
The Silicon Valley Venture Capitalist Confidence Index™ (Bloomberg ticker symbol: SVVCCI) is based on a recurring quarterly survey (since Q1 2004) of Silicon Valley/San Francisco Bay Area venture capitalists. The Index measures and reports the opinions of professional venture capitalists on their estimations of the high-growth venture entrepreneurial environment in the San Francisco Bay Area over the next 6 – 18 months. The Silicon Valley Venture Capitalist Confidence Index™ for the second quarter of 2022, based on a June 2022 survey of 19 San Francisco Bay Area venture capitalists, registered 3.0 on a 5-point scale (with 5 indicating high confidence and 1 indicating low confidence). The Q2 2022 Index fell sharply from the previous quarter’s reading of 3.7. Please see Graph 1 for quarterly trend data.
Confidence among Silicon Valley Venture Capitalists in the high-growth entrepreneurial environment fell sharply in the second quarter of 2022. The venture industry business model depends on a healthy public capital market, and the public equity bear market of the first half of 2022 was anything but that. Rising interest rates hit public growth stocks’ valuations particularly hard as their future promised earnings are being discounted more heavily than before. Thus, the appetite for new issues of VC-financed high-growth (e.g. distant earnings) firms dwindled as well. In fact, IPO exits for VC-backed firms were particularly rare in Q2 hitting a 13 year low.2 Valuations of VC-backed firms, particularly later stage ones are also in decline mimicing their analog public firms valuations this year. Still, market turmoil also presents opportunities for patient capital, and strong fundraising in 20223 ensures capital will be available for visionary startups with strong execution. In the following, I provide the comments of the participating venture capitalist respondents in the Q2 survey that validate their confidence rating along with my analysis. Additionally, all of the Index respondents’ names and firms are listed in Table 1, save those who provided their comments confidentially.
The strong decline in confidence is linked to the public capital market which has seen far fewer exits of VC-backed firms so far in 2022 than in the previous two years. For example, capital raised from venture-backed exits in Q2 2022 was down by over 90% from the year-earlier quarter.4 Highlighting this trend, one of the VC respondents to the Q2 survey, Jon Soberg of MS&AD Ventures, emphasized “This market is the worst since 2008, and maybe since 2000-2001. With high inflation thrown in, there won’t be government intervention like there was with TARP and quantitative easing, so it is not likely to recover as quickly.” Also, Paul Tuan of Andra Capital stressed “We’re in a bear market, which is not expected to recover for another two years.” Another VC respondent who requested anonymity, also noted a “drop in public and private market risk appetite.” Of course, the ability to find a suitable exit is essential for VC portfolio firms, and so a dearth of exit alternatives weighs heavily on sentiment.
Beyond the poor reception of the public markets for VC-backed firms, macro-economic and political issues have also weighed on confidence. Alex Fries of Digital Twins Capital contended “The economy is slowing. Inflation is increasing without any stop in sight. Interest rates are increasing. The war in Ukraine could be expanded to a NATO country or China could attack Taiwan; North Korea could do something. The world is very unstable. Good news is that there is still a lot of ‘dry powder’ for early stage companies. Later stage, there will be less investments.” Another VC respondent also pointed to “economic uncertainty and taxation uncertainty.”
Linking macro and venture-specific issues, Shawn Merani of Parade Ventures observing “public markets down, irrational valuations from the last few years, investment pace of venture firms slowing, rising interest rates, global risks with war and trade,” concluded “things are really slowing down as companies focus on their unit economics with the future fundraising climate very uncertain.” John Malloy of BlueRun Ventures reported “The entrepreneurial environment remains strong here but the current macroeconomic environment is impacting valuations and access to capital.” One VC respondent who provided comment in confidence indicated he was “excited about returning to normal valuations but unsure how long the down cycle will be.”
Howard Lee of Founders Equity Partners provided a detailed perspective, explaining “The public capital markets drawdowns in Q2 punctuated the overall market correction which has dramatically impacted the venture entrepreneurial ecosystem. The effects of the supply shocks, the war in Ukraine, and the Fed actions to raise interest rates in the face of strong inflationary risks have all contributed to increased investor pessimism as the US economy veers towards a possible recession. Venture investment has seen a large decrease as deals take longer to close with investors taking a more cautious approach. CEOs and entrepreneurs have already recognized the decreased investment pace as a longer fundraising cycle and are all openly planning for it. Likewise, while valuation expectations have readjusted, the bid-ask spread remains wide as CEOs and entrepreneurs are slower to ‘see the new reality’ than venture investors, especially in growth and later-stage companies. Venture investment rounds may soon see down rounds, repricing, and restructuring in deals, all reflective of a down market.”
Venture capitalists are reexamining their portfolios of startups in the context of the more challenging macro environment. Dag Syrrist of Valedor Partners suggested most VCs will be assessing and spending time on triage of existing portfolio companies. Mr. Syrrist continued noting “the imbalance lowering public markets will have on institutional allocation to alternatives, including venture capital,” as well as the “unknown reaction anyone under 35 years old will have for the first time deploying [capital] in high interest, high inflation environment.”
The market downturn requires entrepreneurs to adjust their tactics and their expectations. Charles Tan of Lumeira Ventures reasoned “The outlook for the next 6-18 months varies based on the companies’ stages and sectors. With the market’s downturn and the narrowing of the public market window, late-stage private tech companies are the most impacted. Private equity and late stage venture firms are digesting the new valuations, and there is already more scrutiny on business metrics and investment timelines. Although early-stage companies are less impacted, the effects of the adjustments at the late-stage have begun trickling down. Entrepreneurs have to adapt to this new reality, be willing to accept more dilution and to be cost-conscious to prevail through the uncertainties. There is also more willingness at the board level for companies to be acquired. On the bright side, there is still a lot of dry powder and quality companies run by strong management teams will continue to attract investments.”
Another VC respondent confirmed “There are a large number of firms that formed within the last 10 years and have never experienced a downturn. This will inhibit the flow of capital of young companies and many businesses will need to be recapped or just call it a day. Recaps are hard work — and most of the industry is ill-equipped to address them. Innovation, however, will continue and the next three years will present some exceptional opportunities for the prepared mind.” Howard Lee of Founders Equity Partners identified one other potential outcome of the current market environment. He specified “As the specter of a recession and down US economy has led to few exits and a depressed IPO market, early-stage investment and investment in secondaries show the potential for continued growth. In particular, with the large increase in startups and unicorns created in the last four years and the time to exit for venture-backed companies increasing, the supply of potential sellers – founders, early employees, early investors – has also increased. Combined with the continued liquidity needs of these types of sellers, these trends are all favorable for the secondary market investors. Interestingly, sectors such as cybersecurity are expected to remain robust as companies and consumers are both more vulnerable and aware of malicious attacks from nation-states and bad actors.”
However, the current market turmoil may present an opportunity. Bob Ackerman of Allegis Cyber summed up the current environment, saying “It is the best of times; it is the worst of times. Too much capital chasing too many companies with little differentiation has set the stage for a massive market correction with paper value destruction resulting. On the flip side, history tells us this is when the best companies get started. The bar will be high for new startups, demanding better ideas, better teams, better and more efficient business models to get funded – all positives in the long term. The big question is how will the Bay Area fare with it’s high costs of doing business and competition for talent with Big Tech. If you take a step back, there may be more competitive places to build a business, particularly when cash is scarce and efficiency the name of the game.” Similarly, Mohanjit Jolly of Iron Pillar predicted “While the venture entrepreneurial environment will like be choppy for the next year+, it will be a great time to deploy capital into good companies and more reasonable valuations. If, on the other hand, a fund was actively investing in later stage companies during stratospheric valuations, then there are more difficult conversations happening, within the GP as well as between GPs and entrepreneurs.”
Another VC respondent who requested anonymity provided a detailed analysis and projection, writing “Venture funding and investment into venture capital funds will be down over the next 6- 12 months, principally because the public markets will put a damper on public offerings, and that will impact liquidity in the venture ecosystem. Also, there is a historical correlation between stock market valuations and both (1) number of venture financings, and (2) venture financing valuations. In other words, a high valuation environment translates into more deals at high valuations, and that also means liquidity at high valuations and more funds flow into venture capital funds. A virtuous cycle in up markets. All of that reverses when the public markets experience declines in valuations. So how can my rating be a 4? Lower valuation markets are often the best times for venture capital fund returns for funds that are just starting or are in the middle of their investing cycle (usually the first 1-3 years of a venture capital fund). These environments are where the winners and disrupters of tomorrow will be seeded. Thus, it is hard not to be optimistic about the entrepreneur ecosystem during downturns. Therefore, I think the investing environment at reasonable valuations will soon become very favorable for investors, and companies formed and invested in over the next 6-18 months will find a tailwind in the economy at the end of that period and some companies in the venture portfolios during this period will be mega home runs. The hard work for those rewards begins now.”
Some responding VCs had high levels of confidence despite the macro challenges. Jeb Miller of Icon Ventures maintained there is “continued massive opportunity to build startups in the cloud, security and digital health sectors with a return to focus on scaling with capital efficiency that leverages distributed talent and capitalizes on the opportunity to disrupt stalled legacy companies.” Additionally, Sandy Miller of Institutional Venture Partners explained “If we don’t compare it to the recent euphoric environment, the current venture ecosystem is actually in a relatively healthy place by historical standards. There is still plenty of capital available though the momentum investors have retreated to their Miami penthouses. The good companies are still getting financed on non-Draconian terms. The exit environment will be delayed but cash rich buyers are showing significant interest in acquiring strategic assets given more realistic valuations.”
In summary, overall confidence among Silicon Valley Venture Capitalists in the future high growth entrepreneurial environment in the San Francisco Bay Area fell sharply in Q2. Increasingly difficult macroeconomic, political, and public equity market conditions are hitting startups’ valuations and delaying many planned exits. The macro malaise is especially impacting later stage firms that had counted on an IPO and must now reconfigure financing models and growth trajectories. Early stage startups are less impacted as their runway typically does not rely on public market debuts for years to come. Furthermore, capital is readily available for focused startups and more modest valuations are attracting corporate acquirers. In time public markets will recover and more exit opportunities will appear. Until then determined entrepreneurs and their VC backers are best equipped to identify unmet needs, apply creative solutions, and build the future.
1 Dr. Cannice is Professor of Entrepreneurship & Innovation with the University of San Francisco School of Management. Professor Cannice may be reached at firstname.lastname@example.org or by LinkedIn message: https://www.linkedin.com/in/markcannice/
2 PitchBook-NVCA Venture Monitor Report Data Q2 2022.
3 PitchBook-NVCA Venture Monitor Report Data Q2 2022.
4 PitchBook-NVCA Venture Monitor Report Data Q2 2022 Summary Data.
Mark V. Cannice, Ph.D. is Professor of Entrepreneurship and Innovation with the University of San Francisco School of Management. The author wishes to thank the participating venture capitalists who generously provided their expert commentary. Thanks also to Jack Cannice, James Cannice and Joe Cannice for their copy-edit assistance. When citing the Index, please refer to it as: The Silicon Valley Venture Capitalist Confidence Index™, and include the associated Quarter/Year, as well as the name and title of the author.
The Silicon Valley Venture Capitalist Confidence Index™ is a trademark of Mark V. Cannice. Copyright © 2004 – 2022: Mark V. Cannice, Ph.D. All rights reserved.